How to Make Money on Balancer Protocol Yield Farming ETH


I’m a yield farmer, motherfucker!

Have you already built a position in crypto? Great. But is it just sitting around idly collecting dust? My ETH was. An inefficient use of capital. I wanted to make money.

Here’s what you can consider. Earn fees by contributing liquidity to crypto pools. Get some bonus BAL governance token rewards while you’re at it. All while minimising impermanent loss. Thrice the winning – can’t get mad at that!

Side note. Everyone posts pics of tractors and wheat when accompanying DeFi yield farming articles, but does nobody enjoy Tropic Thunder?? The classic “I’m a lead farmer, motherfucker” scene with a black Robert Downey Jr? Nobody? Man.

Standard disclaimer: I am not your financial advisor. This is a personal experiment.

Choosing Balancer Protocol

I had hooked my MetaMask up to Uniswap much earlier, but when Balancer announced their liquidity mining model and BAL began trading on exchanges, I took an interest. Guess you could say Balancer’s user incentivisation strategy worked on me. You can earn higher fees on Uniswap but if you’re bullish on BAL you can forgo some of those Uniswap fees and go after BAL rewards instead.

I used to work at a crypto exchange and management had detected the DeFi trend and began aggressively listing tokens such as SNX, BAL, COMP, DMG, BZRX etc. They saw the wave coming.

Balancer distributes BAL governance tokens as rewards to users. 7.5 million BAL a year, or 140 thousand a week. Owning BAL means you get to have a say on how the protocol evolves over time. It’s like a form of ownership.

Contributing Liquidity

On both Uniswap and Balancer, you collect fees for providing liquidity to pools of crypto. It’s all the rage now, so take advantage of that. Clever farmers are smashing out 100% APR yields with deft manoeuvring across the fields. I’d love to learn from them.

After seeing the rise and fall of BAL from $6+ to $20+ something, and then back to $8, I launched a simple yield farming experiment with 8 ETH. My intention was to contribute liquidity to the sETH-WETH pool as a beginner, in a 4:4 ratio.

The rewards? Trading fees received from people using the liquidity from my pool, and BAL governance tokens.

The 50:50 sETH-WETH pool on Balancer protocol

The Balancer pool’s 0.01% swap fee, and my 8 ETH ($1851.10) of liquidity

ETH Yield Farming on Balancer Protocol

Why did I choose the sETH-WETH pool to contribute liquidity to? What’s sETH? And what’s WETH?

I came across the concept of impermanent loss. Something I’m not prepared for at this stage. It refers to the erosion of your assets should the values of the 2 tokens you contribute to a pool begin to diverge. By getting the outperformance of the appreciating asset arbitraged away, you’re reducing your quantum of the token whose value is rising. In that case you’d have been better off just staying outright long on the outperforming asset.

Source: Uniswaproi.com. Impermanent loss estimates.

I did some quick research with uniswaproi.com to check out impermanent loss estimates. The domain suggests Uniswap but if you’re just using the impermanent loss calculation estimates, that research is still applicable before you begin yield farming on Balancer protocol.

An exaggerated example of impermanent loss would be LINK. Because LINK has been on a tear (400% up in the last 6 months, while ETH has languished at these levels), the impermanent loss on an ETH-LINK pool is actually a nightmarish return, compared to what you’d achieve with an unhedged long LINK position.

Therefore to reduce the effect of impermanent loss, yet benefit from my experiment, I chose 2 assets I have better confidence would maintain a tighter ratio relative to each other. Which leads me to either using 1) wrapped/synthetic assets; or 2) stablecoins. I went with the wrapped/synthetics, because I already had a bunch of ETH anyway and I’m happy staying long ETH.

That explains the sETH (synthetic) and WETH (wrapped). This would maintain my overall exposure to ETH, earn fees, while minimising the impact of impermanent loss, and to top it off – create an opportunity to receive BAL.

Get Ready to Pay Fees

So take some of your ETH and get to work on your farm! I needed an equal proportion of sETH and WETH for the 50:50 Balancer liquidity pool.

Sow the land and get ready to make a few payments.

You gotta pay gas fees when…

  • Swapping ETH for sETH on Uniswap
  • Wrapping ETH to WETH on Balancer
  • Unlocking sETH-WETH pool on Balancer
  • Adding sETH and WETH to Balancer pool

The Ethereum network has been jammed up the last couple of weeks. It took me about half a day for my ETH to move from my Ledger onto MetaMask. The fees for the above transactions cost a few dollars each. Not cheap. But for the price of a little education and experimentation, acceptable.

Making Money on Balancer

Fees from each Balancer pool goes entirely to the liquidity providers – you cut your slice of the fee pie based on the proportion of the liquidity you contributed compared to the size of the pool. In the sETH-WETH example, you make 0.01% in fees only, and my 8 ETH constitute 0.03% of the entire pool.

You can check out the BAL distribution report for your weekly reward. In general, the higher the fees a pool pays you, the fewer BAL distributions you receive, and vice versa. Your BAL is automatically credited to your MetaMask wallet.

Balancer token feefactor

Source: Balancer CEO Fernando Martinelli on Medium

The above shows that as your pool’s fees increases, the feeFactor adjusts the value of your liquidity downwards so that you receive fewer BAL during the weekly distribution. (The protocol’s logic is that pools with lower fees attract more users and are therefore beneficial and should be incentivised.)

Conclusion

So that’s a very basic setup for yield farming on Balancer protocol. Not difficult. Don’t underestimate the time value of money when it comes to accruals. Maybe the best time to start was 4 months ago when Balancer launched. The second best time? Possibly now.

I wrote a more generic article earlier about how to make money on Ethereum in the modern era. I’ve since been digging around a lot in the DeFi yield space, and even left some money on Compound too to watch my COMP governance token reward growing in real time.

I’ll update again in a few weeks on how the sETH-WETH pool is going.

Learning to make money in crypto and DeFi. Everyone’s gotta start somewhere. Adventures in yield farming, written by a wrestler. How hard could it be?

Share your thoughts.

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